Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar’s structure isn’t in doubt.08/13/2012 By Martin Hesse
Otmar Issing is looking a bit tired. The former chief economist at the European Central Bank (ECB) is sitting on a barstool in a room adjoining the Frankfurt Stock Exchange. He resembles a father whose troubled teenager has fallen in with the wrong crowd. Issing is just about to explain again all the things that have gone wrong with the euro, and why the current, as yet unsuccessful efforts to save the European common currency are cause for grave concern.
He begins with an anecdote. “Dear Otmar, congratulations on an impossible job.” That’s what the late Nobel Prize-winning American economist Milton Friedman wrote to him when Issing became a member of the ECB Executive Board. Right from the start, Friedman didn’t believe that the new currency would survive. Issing at the time saw the euro as an “experiment” that was nevertheless worth fighting for.
Fourteen years later, Issing is still fighting long after he’s gone into retirement. But just next door on the stock exchange floor, and in other financial centers around the world, apparently a great many people believe that Friedman’s prophecy will soon be fulfilled.
Banks, investors and companies are bracing themselves for the possibility that the euro will break up — and are thus increasing the likelihood that precisely this will happen.
There is increasing anxiety, particularly because politicians have not managed to solve the problems. Despite all their efforts, the situation in Greece appears hopeless. Spain is in trouble and, to make matters worse, Germany’s Constitutional Court will decide in September whether the European Stability Mechanism (ESM) is even compatible with the German constitution.
There’s a growing sense of resentment in both lending and borrowing countries — and in the nations that could soon join their ranks. German politicians such as Bavarian Finance Minister Markus Söder of the conservative Christian Social Union (CSU) are openly calling for Greece to be thrown out of the euro zone. Meanwhile the the leader of Germany’s opposition center-left Social Democrats (SPD), Sigmar Gabriel, is urging the euro countries to share liability for the debts.
On the financial markets, the political wrangling over the right way to resolve the crisis has accomplished primarily one thing: it has fueled fears of a collapse of the euro.
Cross-Border Bank Lending Down
Banks are particularly worried. “Banks and companies are starting to finance their operations locally,” says Thomas Mayer who until recently was the chief economist at Deutsche Bank, which, along with other financial institutions, has been reducing its risks in crisis-ridden countries for months now. The flow of money across borders has dried up because the banks are afraid of suffering losses.
According to the ECB, cross-border lending among euro-zone banks is steadily declining, especially since the summer of 2011. In June, these interbank transactions reached their lowest level since the outbreak of the financial crisis in 2007.
In addition to scaling back their loans to companies and financial institutions in other European countries, banks are even severing connections to their own subsidiaries abroad. Germany’s Commerzbank and Deutsche Bank apparently prefer to see their branches in Spain and Italy tap into ECB funds, rather than finance them themselves. At the same time, these banks are parking excess capital reserves at the central bank. They are preparing themselves for the eventuality that southern European countries will reintroduce their national currencies and drastically devalue them.
“Even the watchdogs don’t like to see banks take cross-border risks, although in an absurd way this runs contrary to the concept of the monetary union,” says Mayer.
Since the height of the financial crisis in 2008, the EU Commission has been pressuring European banks to reduce their business, primarily abroad, in a bid to strengthen their capital base. Furthermore, the watchdogs have introduced strict limitations on the flow of money within financial institutions. Regulators require that banks in each country independently finance themselves. For instance, Germany’s Federal Financial Supervisory Authority (BaFin) insists that HypoVereinsbank keeps its money in Germany. When the parent bank, Unicredit in Milan, asks for an excessive amount of money to be transferred from the German subsidiary to Italy, BaFin intervenes.
Unicredit is an ideal example of how banks are turning back the clocks in Europe: The bank, which always prided itself as a truly pan-European institution, now grants many liberties to its regional subsidiaries, while benefiting less from the actual advantages of a European bank. High-ranking bank managers admit that, if push came to shove, this would make it possible to quickly sell off individual parts of the financial group.
In effect, the bankers are sketching predetermined breaking points on the European map. “Since private capital is no longer flowing, the central bankers are stepping into the breach,” explains Mayer. The economist goes on to explain that the risk of a breakup has been transferred to taxpayers. “Over the long term, the monetary union can’t be maintained without private investors,” he argues, “because it would only be artificially kept alive.”
The fear of a collapse is not limited to banks. Early last week, Shell startled the markets. “There’s been a shift in our willingness to take credit risk in Europe,” said CFO Simon Henry.
He said that the oil giant, which has cash reserves of over $17 billion (€13.8 billion), would rather invest this money in US government bonds or deposit it on US bank accounts than risk it in Europe. “Many companies are now taking the route that US money market funds already took a year ago: They are no longer so willing to park their reserves in European banks,” says Uwe Burkert, head of credit analysis at the Landesbank Baden-Württemberg, a publicly-owned regional bank based in the southern German state of Baden-Württemberg.
And the anonymous mass of investors, ranging from German small investors to insurance companies and American hedge funds, is looking for ways to protect themselves from the collapse of the currency — or even to benefit from it. This is reflected in the flows of capital between southern and northern Europe, rapidly rising real estate prices in Germany and zero interest rates for German sovereign bonds.
‘Euro Experiment is Increasingly Viewed as a Failure’
One person who has long expected the euro to break up is Philipp Vorndran, 50, chief strategist at Flossbach von Storch, a company that deals in asset management. Vorndran’s signature mustache may be somewhat out of step with the times, but his views aren’t. “On the financial markets, the euro experiment is increasingly viewed as a failure,” says the investment strategist, who once studied under euro architect Issing and now shares his skepticism. For the past three years, Vorndran has been preparing his clients for major changes in the composition of the monetary union.
They are now primarily investing their money in tangible assets such as real estate. The stock market rally of the past weeks can also be explained by this flight of capital into real assets. After a long decline in the number of private investors, the German Equities Institute (DAI) has registered a significant rise in the number of shareholders in Germany.
Particularly large amounts of money have recently flowed into German sovereign bonds, although with short maturity periods they now generate no interest whatsoever. “The low interest rates for German government bonds reflect the fear that the euro will break apart,” says interest-rate expert Burkert. Investors are searching for a safe haven. “At the same time, they are speculating that these bonds would gain value if the euro were actually to break apart.”
The most radical option to protect oneself against a collapse of the euro is to completely withdraw from the monetary zone. The current trend doesn’t yet amount to a large-scale capital flight from the euro zone. In May, (the ECB does not publish more current figures) more direct investments and securities investments actually flowed into Europe than out again. Nonetheless, this fell far short of balancing out the capital outflows during the troubled winter quarters, which amounted to over €140 billion.
The exchange rate of the euro only partially reflects the concerns that investors harbor about the currency. So far, the losses have remained within limits. But the explanation for this doesn’t provide much consolation: The main alternative, the US dollar, appears relatively unappealing for major investors from Asia and other regions. “Everyone is looking for the lesser of two evils,” says a Frankfurt investment banker, as he laconically sums up the situation. Yet there’s growing skepticism about the euro, not least because, in contrast to America and Asia, Europe is headed for a recession. Mayer, the former economist at Deutsche Bank, says that he expects the exchange rates to soon fall below 1.20 dollars.
“We notice that it’s becoming increasingly difficult to sell Asians and Americans on investments in Europe,” says asset manager Vorndran, although the US, Japan and the UK have massive debt problems and “are all lying in the same hospital ward,” as he puts it. “But it’s still better to invest in a weak currency than in one whose structure is jeopardized.”
Hedge Fund Gurus Give Euro Thumbs Down
Indeed, investors are increasingly speculating directly against the euro. The amount of open financial betting against the common currency — known as short positioning — has rapidly risen over the past 12 months. When ECB President Mario Draghi said three weeks ago that there was no point in wagering against the euro, anti-euro warriors grew a bit more anxious.
One of these warriors is John Paulson. The hedge fund manager once made billions by betting on a collapse of the American real estate market. Not surprisingly, the financial world sat up and took notice when Paulson, who is now widely despised in America as a crisis profiteer, announced in the spring that he would bet on a collapse of the euro.
Paulson is not the only one. Investor legend George Soros, who no longer personally manages his Quantum Funds, said in an interview in April that — if he were still active — he would bet against the euro if Europe’s politicians failed to adopt a new course. The investor war against the common currency is particularly delicate because it’s additionally fueled by major investors from the euro zone. German insurers and managers of large family fortunes have reportedly invested with Paulson and other hedge funds. “They’re sawing at the limb that they’re sitting on,” says an insider.
So far, the wager by the hedge funds has not paid off, and Paulson recently suffered major losses.
But the deciding match still has to be played.
Translated from the German by Paul Cohen
- DER SPIEGEL: Investors Prepare for Euro Collapse (investmentwatchblog.com)
- Spiegel: Investors Prepare For Euro Collapse | ZeroHedge (underinformation.wordpress.com)
- Spanish Banks’ ECB Loans Rise as Rajoy Mulls Second Bailout Call – Bloomberg (bloomberg.com)
- Stop Fooling Yourself… NO Entity On Earth Can Stop This (zerohedge.com)
- Things Are Going To Collapse Again In Europe ( Bank of America and AMP) (ampgoldportfolio.com)
- Merkel Returns to Crisis as Leaders Squabble Over Bond Purchases (bloomberg.com)
- Hedge Funds Capitulate on European Shorts Fastest Since 2009 (bloomberg.com)
- The Market Oracle – DK Matai – European Bankers And Top Politicians Fear Collapse Of The Euro – 12 August 2012 (lucas2012infos.wordpress.com)
This week the SubseaIQ team added 3 new projects and updated 21 projects. You can see all the updates made over any time period via the Project Update History search. The latest offshore field develoment news and activities are listed below for your convenience.
Aug 9, 2012 – Petroceltic International is expecting to drill a well in Italy next year, reported Dow Jones Newswires. In 2010, the company planned to drill an appraisal well on the Elsa discovery in the Central Adriatic, but plans were shelved when Italy banned offshore drilling in reaction to the Macondo incident in the Gulf of Mexico. With the ban now lifted, the company is hopeful a well can be drilled in 2013. “When the Italy ban came in, we were within months of spudding an appraisal well on the Elsa field, which is an old oil discovery of somewhere between 30 million and 180 million barrels, made by ENI S.p.A. in 1992. We have a CPR [competent person’s report] that says the most likely oil-in-place is a couple of hundred million barrels,” the Chief Executive Brian O’Cathain said in a statement. Before it starts drilling, however, the company has to reapply for a permit, but Mr. O’Cathain believes that the current government is very favorably disposed towards restarting exploration and production activities.
Project Details: Elsa
Aug 7, 2012 – Eni Australia has confirmed that it will take over the ENSCO 109 (350′ ILC) jackup on August 15, and after an anticipated four-day tow, the operator expects the rig to arrive at the Heron South-1 location on or around August 19. The operator will then appraise the find, which is part of the work program Eni has agreed to complete in order to earn a 50 percent participating interest in the permit. Eni has 60 days after the well to elect to either drill a second Heron well or withdraw from participation in the Heron area.
Project Details: Heron
Aug 3, 2012 – Nexus Energy has inked an agreement with Shell and Osaka Gas following board approvals Friday to form a new joint venture which will accelerate the exploration and development of the Crux gas and condensate field offshore Western Australia. The final agreement was formally signed and executed. The agreement sees Shell taking its place as the operator of the production license AC/L9 with an 80 percent interest. Nexus and Osaka Gas hold a 17 percent and 3 percent interest respectively. The agreement also provides Nexus with a 12 month put option to sell 2 percent of its equity interest in the JV to Shell for $78.6 million (AUD75 million). Nexus said in a statement that the JV will initially focus on converting the existing AC/L9 offshore production license into a retention lease. This will require a detailed work program, which include technical studies of a range of development options, including a standalone development concept, and exploration drilling of the Auriga prospect targeted for early 2014. The development options currently under consideration for the Crux field include a tie-in to Shell’s Prelude floating liquefied natural gas (FLNG) vessel or a standalone FLNG project.
Project Details: Prelude
N. America – US GOM
Aug 9, 2012 – Apache has completed drilling operations on the Parmer prospect in Green Canyon Block 823 in the Gulf of Mexico. The well has been logged, and pressure readings and fluid samples have been taken in several Miocene objective sands. Thus far, data indicates approximately 240 feet (73 meters) of net condensate-rich gas pay in two gas sands are full to base, as well as 40 feet (12 meters) of net oil pay in two sands. Both have encountered oil on water. The partners plan to analyze the data and develop a forward plan.
Project Details: Parmer
Aug 8, 2012 – W&T Offshore reported that the A-4 ST at the Matterhorn field began producing approximately 3,190 boepd net in mid-June and the A-13 at Mahogany began producing approximately 1,640 boepd net in late May. During the second quarter, the company commenced drilling the A-5 ST well at Mahogany, and is now currently completing the well. W&T expects to bring the A-5 ST online later this week with projected initial production rates of approximately 925 boepd net to the company. Following the A-5 ST well at Mahogany, the company expects to drill the A-9 ST development well to further develop the P sand south of the A-5 ST during the third quarter. Following the A-9 ST well, W&T anticipates moving to another development drill well for a possible spud date in the fourth quarter followed by completion in early 2013.
Project Details: Matterhorn
Aug 6, 2012 – McDermott International announced that one of its subsidiaries received a contract by Williams Partners for transportation and installation services for a spar hull in the Gulf of Mexico. The company will transport and install the Gulfstar FPS GS-1 spar hull and moorings. The spar platform will be moored on the Tubular Bells development, situated about 150 miles (241 kilometers) offshore, on Mississippi Canyon Block 683 and 726 in a water depth of 4,200 feet (1,280 meters). McDermott’s DB50 vessel will install the moorings before transporting the classic-design spar hull to the installation site where it will be upended and ballasted before installing a temporary work deck. The offshore campaign is expected to begin in the third quarter of 2013.
Project Details: Tubular Bells
Europe – East
Aug 9, 2012 – Statoil reported that it has divested its 24 percent stake in the consortium developing the Shtokman gas field after the agreement lapsed, but the company remains interested in the project. The initial agreement, in which Russia’s OAO Gazprom held a controlling 51 percent stake and France’s Total SA 25 percent in the consortium, expired at the end of June with the three companies failing to agree on technical and financial plans to develop the massive gas field.
Project Details: Shtokman
Africa – West
Aug 9, 2012 – Panoro Energy announced that operator Harvest Natural Resources has secured the use of a semisub to drill the Tortue prospect in the Dussafu Marin Permit offshore Gabon. The drilling unit, the Scarabeo 3 (mid-water semisub), is expected to commence drilling operations in 4Q 2012. The Tortue Marin well will be located about 31 miles (50 kilometers) offshore Gabon and 9 miles (15 kilometers) southeast of the 2011 Ruche discovery in 380 feet (116 meters) water depth. The well targets pre-salt Gamba and mid-Dentale reservoirs and a secondary post-salt Madiela reservoir. When combining these reservoirs the Tortue prospect has, according to the operator, consolidated mean prospective resources of 28 MMbbls with 56 percent geological chance of success.
Project Details: Tortue
Aug 8, 2012 – PA Resources reported that following a full evaluation of remedial options to replace or reinstate the earlier communicated failed production well at the Azurite field in the Republic of Congo, the joint venture has agreed to drill a sidetrack. Preparatory activities have commenced and drilling operations are expected to start in early 4Q 2012 and take several months to complete. The Azurite field commenced production in August 2009.
Project Details: Azurite
S. America – Other & Carib.
Aug 7, 2012 – BPZ Energy announced that the world’s first buoyant tower drilling and production platform is en route to the Corvina field for installation offshore Peru. The CX-15 platform was safely completed and successfully delivered to BPZ Energy at Wison Offshore & Marine’s China-fabrication facility in 11 months from contract signature. Wison’s scope included the engineering, procurement and construction of the facility’s 2,500 ton buoyant tower hull and 1,500 ton topsides facility. The buoyant tower hull for the facility was designed and engineered through a joint venture between Wison affiliate, Horton Wison Deepwater, and GMC Limited and consists of four, ring-stiffened connected cylindrical tubes with one central suction pile. Each cell measures 26 feet (8 meters) in diameter and 197 feet (60 meters) long, with a total hull length, including suction pile, of 230 feet (70 meters). When installed, the buoyant tower will support the three-level topsides facility designed by Audubon Engineering and GMC Limited and equipped to produce 12,200 barrels per day of oil, 12.8 million standard cubic feet per day of gas and inject 3,500 barrels per day of water. Additionally, the facility will be capable of supporting a drilling rig with 24 well slots. The CX-15 drilling program, which is the second platform installation at the Corvina field, will target 23 million barrels of proved undeveloped reserves (PUD).
Project Details: Corvina
S. America – Brazil
Petrobras Discovers Oil at Pecem Prospect
Aug 8, 2012 – Petrobras has verified the presence of oil in the Ceara Basin during drilling operations of the 1-BRSA-1080-CES (1-CES-158) well. The well, commonly known as Pecem, is located in a water depth of 6,985 feet (2,129 meters). The well’s current depth is 14,469 feet (4,410 meters) and drilling will continue to a total depth of 18,045 feet (5,500 meters). The consortium will continue the operations until the estimated depth is met.
Aug 8, 2012 – SBM Offshore and its JV partners QGOG Constellation and Mitsubishi Corporation have secured a US $1.05 billion to finance the construction of the Cidade de Ilhabela FPSO. The loan will be repaid over a 10-year period starting at first oil, which is expected in September 2014 and benefit from a competitive pricing package arranged on a club deal basis with reputable international commercial banks. The vessel will be moored on the Sapinhoa field in 7,024 feet (2,141 meters) of water.
Project Details: Sapinhoa (Guara)
Asia – SouthEast
Aug 3, 2012 – Lundin Petroleum has commenced the second well in its 2012 Malaysian drilling campaign with the spud of Berangan-1 exploration well in SB 303 Block, offshore Malaysia. The well will target hydrocarbons in mid-Miocene aged sands in a faulted anticline in an undrilled sub-basin 6 miles (10 kilometers) to the southeast of the Tarap gas discovery made by Lundin Petroleum in 2011. The Offshore Courageous (350′ ILC) jackup is drilling a vertical well to a depth of 5,577 feet (1700 meters) in approximately 230 feet (70 meters) water depth.
Project Details: Berangan
Europe – North Sea
Aug 7, 2012 – AMEC has received a detailed design contract from GDF Suez for the Cygnus gas field development in the UK sector of the North Sea. The detailed design contract, following the FEED work, starts immediately and is scheduled for completion in 2014. The detailed development concept for the Cygnus field consists of two drilling centers, four platforms and initially 10 development wells; the planned export route is through the ETS (Esmond Transportation System) pipeline system to the Bacton gas terminal in North Norfolk. First gas is expected in late 2015.
Project Details: Cygnus
Aug 7, 2012 – GDF Suez has officially sanctioned the Cygnus project to develop the sixth largest gas field in the UK sector of the North Sea. The consortium has signed initial contracts, which will kick start the project, and plan to award major contracts soon. Production is expected to start in late 2015. The field is expected to meet demand for nearly one and a half million homes at peak production, accounting for around 5% of the UK’s gas production. GDF stated that the partnership welcomed the recent field allowance for new large shallow water gas fields by the UK Government, which proved the certainty and confidence to proceed with the development.
Project Details: Cygnus
Aug 7, 2012 – Providence Resources has issued a technical report on its Dromberg prospect, offshore Ireland, indicating its potential as a hydrocarbon target. Drombeg, which was awarded to Providence and its partner Sosina Exploration as Licensing Option 11/9 in the 2011 Irish Atlantic Margin Licensing Round, is located approximately 140 miles (225 kilometers) off West Cork in 8,200 feet (2,499 meters) of water. The prospect is targeting a Lower Cretaceous zone, demonstrating a significant seismic amplitude anomaly and low seismic impedance as well as a market AVO (amplitude versus offset) response. Providence added that it has also identified an underlying second seismic anomaly that has been modeled to be consistent with hydrocarbon-bearing sandstone.
Project Details: Dromberg
Aug 7, 2012 – Total has commenced drilling at the Garantiana prospect, exploratory well 34/6-2S, in the Norwegian sector of the North Sea. The well is being drilled by the Borgland Dolphin (mid-water semisub), and is targeting stacked Jurassic/Triassic reservoirs. The water depth of the site is 1,247 feet (380 meters).
Project Details: Garantiana
Aug 6, 2012 – Total reported that it expects to install a cemet plug, designed to seal a well, at its Elgin North Sea platform. Since the leak was stopped mid-May, Total and its contractors “have now restarted the essential safety and support systems on board the Elgin complex and the adjacent Rowan Viking (430′ ILC) drilling rig,” the company said in a statement.
Project Details: Elgin/Franklin
- Hercules Offshore Buys More Shares in Discovery Offshore S.A. (mb50.wordpress.com)
- Offshore Drilling: Sneaky Sneaky Administration (mb50.wordpress.com)
- Recap: Worldwide Field Development News Jul 27 – Aug 2, 2012 (mb50.wordpress.com)
Walker sees four main possibilities, ranging from somewhat benign to extremely costly.
We summarize them quickly here.
- Scenario #1: EU sanctions get put into place starting July 1, resulting in 0.6 million of barrels per day coming off the market. In this case, Brent Crude would rise to about $130/barrel, though possibly less, since the embargo might make exemptions for some distressed buyers of Iranian oil, like Italy and Greece.
- Scenario #2: Full EU sanctions are put in place, plus there’s another 10% cut from other customers. In this case, we’d be talking about oil going to $138/barrel.
- Scenario #3: Iranian crude exports are halted entirely, perhaps as a result of an Israeli air strike. Then we’re talking about a loss of 2.5 million barrels per day of supply, and Brent Crude prices up around $205.
- Scenario #4: The complete shutdown of Iranian oil. This would require some kind of military action and wide internal upheaval. In this case, the world would lose 4 million barrels per day, and we’d see crude as high as $270 per barrel.
Read more: BI
- The 10 Countries That Would Get Screwed In An Iranian Oil Shutdown (businessinsider.com)
- What Happens if Iran Does Close the Strait of Hormuz? $440 Oil? (247wallst.com)
- Iran stops oil sales to British, French companies (mb50.wordpress.com)
- SHIPPING CEO: Iran Could Send Oil To $440/Barrel (businessinsider.com)
- Four Scenarios For Engaging Iran At The Strait Of Hormuz (businessinsider.com)
Tehran has fulfilled its threat to retaliate for the EU’s oil embargo, agreed by the bloc on January 26. The sanctions gave the EU members time till July to find new suppliers.
Officials within Iran immediately called to cork the black gold stream to Europe, targeting economies weakened by the ongoing financial crisis. On Wednesday, these calls became reality.
- Iran could ban EU oil exports next week (mb50.wordpress.com)
- Iran ‘definitely’ closing Strait of Hormuz over EU oil embargo (mb50.wordpress.com)
- EU firms renew Iran oil deals to win sanction reprieve (mb50.wordpress.com)
- Sanction Show Signs Of Taking Toll On Iran | Fox News (foxnews.com)
- Iran Gave Syria $1 Billion To Aid Regime Against Sanctions, Documents Reveal | Fox News (foxnews.com)
- U.S. naval carrier group positioned closer to Iran (theextinctionprotocol.wordpress.com)
- Turkey Pledges to Stick with Iranian Oil (ibtimes.com)